In a 2014 shareholder letter, Buffett highlighted 'inadequate diversification' as one of the factors that can 'destroy the decent returns that a life-long owner of equities would otherwise enjoy.'

Now, this perplexed my colleague to no end. Isn't Buffett the sage who advocates the supreme merits of a concentrated portfolio?

Oh yes, he is! Here's something he said in 2008:

Diversification doesn't make sense. It's crazy to put money in your twentieth choice rather than your first choice... Charlie Munger (Berkshire vice-chairman) and I operated mostly with five positions. If I were running $50, $100, $200 million, I would have 80 percent in five positions, with 25 percent for the largest.

So what's going on?

It's in our nature to think in simplistic terms. We love information in snippets. If we can get what we want with just a sentence or a phrase, who wants the long story? This is the basis of the advertising industry. It's how branding works. It's how headlines stick. A catchy slogan or a phrase is all most of us want or need to make an impression.

And investors trying to figure out what to do also tend to rely on such shortcuts - no surprise here. Sadly, investing doesn't work that way.

Take Warren Buffett quotes for example. Buffett has the knack of saying things in a humorous way. And the fact that he's the world's best investor means his quotes are extremely popular.

Here's the issue: In his over six decades of investing, Buffett's situations and circumstances have varied enormously over time.

From investing in companies to fire the management...to investing because of the management.

Buffett has seen it all. And each situation came with its unique problems that needed fixing. So when we hear a Buffet quote, we must consider its background. Taking it out of context can do severe harm.

Unfortunately, short quotes often are taken out of context. They then become open to interpretation...and misinterpretation. As investors, we must be wary of this. We're investing our hard earned money after all. We must be sure of the context of a quote if we're going to take our investing cues from it. Half information can be 100% harmful.

As for Buffett's two quotes on diversification, each taken in isolation could easily misguide an investor. Because here's the bit you would be missing:

If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it's not your game, participate in total diversification.

Do you like to take your investing cues from famous quotes? How do you deal with the problem of understanding them in context? Let us know your comments or share your views in the Equitymaster Club.

2.18 Chart of the day

Reforms come at their own cost. Diesel deregulation, a relief for oil marketing companies, posed a major challenge for diesel auto makers as a key incentive to own diesel vehicle was removed. And this was just the beginning.

After Delhi, the latest speed breaker for auto companies has come from the ban on diesel vehicles (above 2000 cc) in Kerala. As per an article in The Hindu Business Line, the automakers (including suppliers) were hardly prepared for the ban. Especially, having made investments to the tune of Rs 750 billion already in diesel engines.

Car makers with large investments in diesel engines

Such regulations will go a long way in influencing buyers' decisions for other categories and in other regions. Also, they are a stern reminder how things can go wrong and the need for the companies to be nimble in face of such setbacks.

The drive against diesel vehicles could lead to a significant reshuffling in the market shares of automakers, favoring the ones with petrol cars. It will be interesting to watch how different automakers deal with the crisis.

Meanwhile, the message for investors is clear - never take a trend or growth and profitability of large profitable companies for granted. Make sure that the management is competent enough to mold the business model to overcome such risks. My colleague Tanushree Banerjee has recently written an interesting piece on what such events tell you about stocks. To read more about the same, please click here.

3.25

Are you done worrying about the non-performing assets of Indian banks? Well, you shouldn't, so soon!

It's true that the massive clean-up of Indian banks' balance sheets was long overdue. And the RBI's mandate to provide for the biggest chunk of bad loans and stressed assets is a good start. But it will be sometime before the sector gets back to its feet. And even longer before banks in India get aggressive on lending to corporates. So the bank lending led GDP growth will take some time for India.

If you ask RBI governor Rajan, the NPAs of Indian banks are not his only worry. But he is keeping his eyes on the NPAs of Chinese banks too.

Now Indian corporates have limited borrowings from Chinese banks. But the stressed loans in China too are estimated to be around 5.5% of the bank loan book today. In addition, there may be serious weaknesses in the shadow banking system. This again could feed back to banks. Clearly, cleaning up China's financial system is going to be far more challenging than India's, given the former's size. And that could have a cascading effect on global growth.

China's NPAs may not be a direct threat to India's GDP or corporate borrowing. But the RBI is right in pointing out the scale of the problem before investors and other regulators get callous about it.

4.20

Barring Brazil (down 2.1%) and China (0.2%), the major global indices closed on a positive note. The US markets posted biggest weekly gain since March 2016. Recently, Federal Reserve Chairwoman Janet Yellen has indicated possibility of interest-rate increase in the coming months if the US economy continues to show signs of improvement.

Crude prices surged and touched US$ 50 per barrel mark during the week. Profit growth for China's industrial firms slowed in April. This was in line with other data released during the month suggesting weak growth. For the January-to-March period, China's economy grew by 6.7% YoY, registering slowest quarterly pace since 2009.

Back home, Indian markets closed the week on a strong footing. The BSE Sensex surged over 5%. Expectation of good monsoon and firm global cues fueled buying activity in the Indian indices. Over and above, the March quarter of 2016 (4QFY16) has shown signs of improvement for some companies. Consequently, sharp surge was seen in the stocks that declared results above the street estimates.

Talking about the positive sentiments, most of you would have read about Rahul Shah's prediction of a 70% upside in the Sensex. Now we did not pull that number out of a hat. It comes from constantly tracking the performance of hundreds of listed companies versus their long-term track record. Our research suggests strong reasons why the 70% earnings upside in stocks can be for real.

And in the next couple weeks, we will release a report exclusively for our StockSelect subscribers called Sensex 40,000: 4 Stocks to Profit from the Coming Stock Market Wave. Do keep an eye out for it.

Performance During the Week Ended 27th May, 2016

4:56 Weekend Investing mantra

"I tended to operate, as so many successful value investors do, not looking at Exxon and Royal Dutch and Procter & Gamble and Coca-Cola. Most of the value investors, if you analyze who've been successful over a long time, have operated in less followed stocks." - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

Today's Premium Edition.

Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...

The state election results and the resignation of RBI governor, Urjit Patel, has made the market nervous. It is exactly in times like these, you can get to buy the best quality safe stocks at the right prices.

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.